The Russian Ministry of Finance is removing Cyprus from the "black list" of offshore jurisdictions from January 1, 2013.
The move was made official in Order No. 115-n issued on August 21, 2012, which was published on October 31, 2012 (the "Order").
Implications for taxpayers
Removal of Cyprus from the "black list" of offshore jurisdictions will improve the tax treatment of dividends payable to Russian holding companies from Cypriot subsidiaries and mean the new Russian transfer pricing rules will not apply to transactions with non-related Cypriot companies.
The Order amends the list of low tax jurisdictions and/or jurisdictions not disclosing information on financial transactions ("black list" of offshore jurisdictions) established by Decree of the Russian Ministry of Finance No. 108-n, dated November 13, 2007, that historically included Cyprus. The removal of Cyprus from the "black list" will lead to the following tax consequences:
- 0% profits tax rate for dividends
Dividends payable by Cypriot subsidiaries to Russian holding companies may be subject to 0% profits tax, provided that on the date of dividend payment the Russian entity receiving them has continuously held at least 50% of the charter capital of the Cypriot subsidiary for not less than 365 days. This exemption did not apply when Cyprus was on the "black list", thereforedividends distributed by Cypriot subsidiaries to their Russian holding companies were subject to 9% profits tax.
- Application of transfer pricing rules
Transactions between Russian companies and non-related Cypriot companies will not be automatically considered as controlled transactions for Russian transfer pricing purposes. Russian transfer pricing rules will still apply to cross-border transactions with related Cypriot companies and to cross-border transactions with Cypriot companies in certain foreign exchange trade commodities.
Actions to consider
- Russian companies may consider Cyprus as an attractive jurisdiction for their foreign investments;
- Russian companies should consider new rules for their transfer pricing planning and compliance purposes.